Meadox Medicals, Inc. v. Life Systems, Inc.
| Decision Date | 11 May 1998 |
| Docket Number | No. CIV. A. 97-3001 NHP.,CIV. A. 97-3001 NHP. |
| Citation | 3 F.Supp.2d 549 |
| Parties | MEADOX MEDICALS, INC. v. LIFE SYSTEMS, INC. |
| Court | U.S. District Court — District of New Jersey |
Benjamin Haglund, Pitney, Hardin, Kipp & Szuch, Morristown, NJ, William N. Berkowitz, Mark W. Batten, Sarah E. Marston, Bingham, Dana, LLP, Boston, MA, for Plaintiff.
Michael L. Rich, Dillon, Bitar & Luther, Morristown, Robert Watkins, Marco, Watkins & Owsiany, Grosse Point, MI, for Defendant.
SECOND AMENDED LETTER OPINION ORIGINAL ON FILE WITH CLERK OF THE COURT
Dear Counsel:
This matter comes before the Court on cross-motions for summary judgment as to defendant Life System, Inc.'s liability for breach of a covenant not to compete with plaintiff Meadox Medicals, Inc.1 Defendant has also cross-moved for leave to file antitrust counterclaims. Both parties have moved to strike particular affidavit testimony from the record. For the reasons explained more fully below, defendant's motion for summary judgment is GRANTED and plaintiff's motion for summary judgment is DENIED. The motions to strike testimony, as well as defendant's motion for leave to file a counterclaim, are DISMISSED AS MOOT.
Life Systems, Inc. ("LSI") was for many years the exclusive distributor of Meadox Medical, Inc.'s ("Meadox") vascular graft products in Michigan and Ohio. The last contract between Meadox and LSI was executed on or about December 6, 1994, and granted LSI the exclusive right to distribute the grafts in its territory between January 1, 1995 and December 31, 1996. See Distributor Appointment Letter, attached as Exhibit A to Declaration of Mark W. Batten.
The agreement contained a promise by LSI that it would not offer products competitive with Meadox's during the term of the contract and for one year thereafter:
[N]either the Company [LSI] nor any of its subsidiaries, parents, principals, stockholders or affiliates, will, for itself or on behalf of any person, firm, entity or corporation other than [Meadox], directly or indirectly, offer for sale or solicit orders for, within the Territory, any products or services the intended use of which is competitive with those Products offered by [Meadox].
Distributor Appointment Letter, § 3. In the event that the contract was terminated or otherwise expired, LSI further agreed "to cooperate with [Meadox] in an orderly winding up of [LSI]'s affairs with Meadox and extend all reasonable assistance to any successor for its territory," id. at § 10(a), which also required LSI to introduce the new representatives to the customers. See id. at § 10(b).
Meadox decided not to extend the contract beyond its natural expiration on December 31, 1996. As Meadox informed LSI in May 1996, Meadox had decided to sell its products directly, without an intermediate distributor, beginning no later than January 1, 1997. See Letter attached as Exhibit E to Batten Decl.
In August of 1996, Michael Wierzbinski, LSI's President, Chief Operating Officer, and Treasurer, discussed with Vice-Presidents Peter Molina and Michael DeMars the possibility of starting a separate company to sell the Meadox-competitive products that LSI could no longer sell itself. See Wierzbinski Dep. 48-49, Molina Dep. 55:3-9, DeMars Dep. 61:23-62:4, attached as exhibits to Deposition Excerpts Submitted in Support of Plaintiff's Motion for Summary Judgment. The three officers expressly discussed LSI's non-competition obligations to Meadox, and concluded that "any contractual obligations that Life Systems had with Meadox would not affect [them]." Wierzbinski Dep. 60:20-25.
The LSI executives also sought permission from LSI's shareholders, David Blake and Sheldon Davis, to establish the new company, "Orion Medical," to market the products of Impra, Vascutek, and Baxter, each of which makes grafts that compete with Meadox products. See Wierzbinski Dep. 51:20-53:8, Blake Dep. I:17:24-I:19:14, II:49:21-II:50:2. Indeed, Sheldon testified that he and Blake were pleased by the Orion proposal, because they feared that LSI's non-compete agreement with Meadox would drive LSI's sales force to other companies. See Davis Dep. 52:7-53:13, 55:6-56:23.
In September 1996, Wierzbinski, Molina, and DeMars attended a one and a half day trade conference in Chicago and spoke with numerous Meadox competitors about the prospect of selling their products. Wierzbinski incorporated Orion Medical, Inc. the same month. Shortly thereafter, Wierzbinski, still LSI's president, entered into a distribution agreement on behalf of Orion with Vascutek and Baxter Healthcare Corporation — both of which compete with Meadox.
In mid-December, 1996, just weeks before the expiration of the Distribution Agreement, LSI's officers hosted an "Orion Medical/Life Systems Sales Meeting" in Indianapolis, which was attended by the LSI sales representatives who had been invited to sell on behalf of Orion. The agenda, drafted by Molina and printed on LSI letterhead, welcomed the LSI employees to "the first annual meeting of Orion Medical." Exhibit 1 to Batten Decl.
After the "Orion/Life Systems Sales Meeting," Wierzbinski, Molina, and DeMars resigned as officers of LSI, but remained as "consultants." They marketed Meadox-competitive products through "independent Orion representatives" — all of whom are still full-time employees at LSI. Indeed, it appears that the only products Orion sells are the Meadox-competitive grafts that LSI is prohibited from selling.
I. Covenant Not To Compete
Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment may only be granted if, drawing all inferences in favor of the nonmoving party, there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. See Chipollini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d Cir.), cert. dismissed, 483 U.S. 1052, 108 S.Ct. 26, 97 L.Ed.2d 815 (1987). Summary judgment may be granted against a party who fails to adduce facts sufficient to establish the existence of any element essential to that party's case, for which that party will bear the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of identifying evidence that demonstrates the absence of a genuine issue of material fact. Id. Once that burden has been met, the nonmoving party must set forth "specific facts showing that there is a genuine issue for trial," or the factual record will be taken as presented by the moving party and judgment will be entered as a matter of law. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
The nonmovant must "do more than simply show that there is some metaphysical doubt as to the material facts." Id. at 586. Speculation, conclusory allegations, and mere denials are insufficient to raise genuine issues of material fact. To defeat "a properly supported summary judgment motion, the party opposing it must present sufficient evidence for a reasonable jury to find in its favor." Groman v. Township of Manalapan, 47 F.3d 628, 633 (3d Cir.1995).
As this case arises under the Court's diversity jurisdiction pursuant to 28 U.S.C. § 1331, the Court will resolve the motions in accordance with the substantive laws that would be applied by a New Jersey court in this case. See Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The contractual relationship between Meadox and LSI is subject to a choice of law provision, which designates New Jersey law as the controlling legal authority. New Jersey courts rely upon Section 187 of the Restatement (Second) of Conflicts of Laws in determining whether to enforce such a clause. See Kalman Floor Co., Inc. v. Jos. L. Muscarelle, Inc., 196 N.J.Super. 16, 21-22, 481 A.2d 553 (App.Div.1984), aff'd, 98 N.J. 266, 486 A.2d 334 (1985). Since neither party objects to the choice of law provision, and since its enforcement would not violate a fundamental policy of the State of New Jersey, the Court will decide the dispute in accordance with New Jersey substantive law. See Conopco, Inc. v. McCreadie, 826 F.Supp. 855, 864 (D.N.J.1993), aff'd, 40 F.3d 1239 (3d Cir.1994).
This Court is confident that LSI's executive officers established Orion for the specific purpose of circumventing LSI's covenant not to compete with Meadox. It is a transparent sham. Nevertheless, the outcome of the instant summary judgment motions turns upon whether the covenant is enforceable under New Jersey law.
New Jersey courts will only enforce covenants not to compete that are reasonable. See Solari Industries, Inc. v. Malady, 55 N.J. 571, 264 A.2d 53 (1970). A party seeking to enforce such an agreement must establish its reasonableness under Solari's three-pronged standard: (1) the covenant must be necessary to protect the parties' legitimate interests; (2) it must cause no undue hardship on the former employee; and (3) it must not injure the public interest. See A.T. Hudson & Co. v. Donovan, 216 N.J.Super. 426, 432, 524 A.2d 412 (1987)(citing Solari, 55 N.J. at 585, 264 A.2d 53).2
In this case, Meadox asserts two legitimate interests that, in its view, justify enforcement of the covenant: Meadox's confidential pricing information and strategies, and its customer relationships. Meadox contends that defendants misappropriated this proprietary information in violation of the covenant.
An employer's customer relationships and confidential pricing strategies may be protected through restrictive covenants. See Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 626, 542 A.2d 879 (1988). To be judicially protected under New Jersey law, "misappropriated information need not rise to the level of the usual trade secret," and indeed, may otherwise be publicly available. Platinum Management, Inc. v. Dahms, 285 N.J.Super. 274, 295, 666...
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